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Risk aversion, uncertainty, and monetary policy in zero lower bound environments

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  • Hahn, Jaehoon
  • Jang, Woon Wook
  • Kim, Seongjin

Abstract

Bekaert et al. (2013) show that a lax monetary policy decreases both risk aversion and uncertainty, and that shocks to risk aversion and uncertainty induce changes in monetary policy. We extend their analysis for the pre-crisis period to the post-crisis period by using a “shadow short rate” as a proxy for unconventional monetary policies in zero lower bound environments. We find that the empirical link between monetary policy, risk aversion, and uncertainty found in Bekaert et al. (2013) persists even in the post-crisis period, but the link is uncovered only when the shadow short rates are used to measure the monetary policy stance.

Suggested Citation

  • Hahn, Jaehoon & Jang, Woon Wook & Kim, Seongjin, 2017. "Risk aversion, uncertainty, and monetary policy in zero lower bound environments," Economics Letters, Elsevier, vol. 156(C), pages 118-122.
  • Handle: RePEc:eee:ecolet:v:156:y:2017:i:c:p:118-122
    DOI: 10.1016/j.econlet.2017.04.028
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    References listed on IDEAS

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    1. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    2. Black, Fischer, 1995. "Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-1376, December.
    3. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    4. Leo Krippner, 2013. "A tractable framework for zero lower bound Gaussian term structure models," Reserve Bank of New Zealand Discussion Paper Series DP2013/02, Reserve Bank of New Zealand.
    5. Michael D. Bauer & Glenn D. Rudebusch, 2016. "Monetary Policy Expectations at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(7), pages 1439-1465, October.
    6. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
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    Cited by:

    1. Besma Hkiri & Juncal Cunado & Mehmet Balcilar & Rangan Gupta, 2021. "Time-varying relationship between conventional and unconventional monetary policies and risk aversion: international evidence from time- and frequency-domains," Empirical Economics, Springer, vol. 61(6), pages 2963-2983, December.
    2. Sakshi Saini & Sanjay Sehgal & Florent Deisting, 2020. "Monetary Policy, Risk Aversion and Uncertainty in an International Context," Multinational Finance Journal, Multinational Finance Journal, vol. 24(3-4), pages 211-266, September.
    3. Jang, Woon Wook, 2020. "Risk aversion, uncertainty, and monetary policy: Structural vector autoregressions identified with high-frequency external instruments," Economics Letters, Elsevier, vol. 186(C).
    4. Evans, Jocelyn D. & Robertson, Mari L., 2018. "The effects of the Fed’s monetary tightening campaign on nonbank mortgage lending," Economics Letters, Elsevier, vol. 171(C), pages 164-168.
    5. Kim, Youngju & Lim, Hyunjoon & Sohn, Wook, 2020. "Which external shock matters in small open economies? Global risk aversion vs. US economic policy uncertainty," Japan and the World Economy, Elsevier, vol. 54(C).
    6. Youngju Kim & Hyunjoon Lim, 2018. "Which External Shock Matters in Small Open Economies? US Economic Policy Uncertainty vs. Global Risk Aversion," Working Papers 2018-29, Economic Research Institute, Bank of Korea.

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    More about this item

    Keywords

    Monetary policy; Shadow short rate; Risk aversion; Uncertainty;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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